The Japanese government is walking on a sword’s edge, though. On one hand they need inflation to be able to keep the debt repayments going, but on the other, by pushing for higher inflation they’re inevitably pushing for higher interest rates as well—meaning higher debt payments.
They’ve backed themselves into a corner.
This system clearly has an expiration date, one that’s long past due.
As it is, over 25% of Japan’s tax revenue goes towards just the INTEREST on the debt.
Remember, the late Ottoman Empire’s fiscal situation spiraled out of control just in a matter of years, to the point when they were paying 52% of their tax revenue just to pay interest on the debt in 1877. And at that point they were finished. They defaulted that year.
In April, the Japanese government raised the sales tax rate from 5% to 8%, which while doing nothing for the government’s ability to cover debt payments, did significant damage on the country’s growth in terms of GDP.
Clearly that didn’t work out very well, so they’re postponing the planned second increase in the sales tax.
But by doing that, the country’s credit rating was promptly downgraded by Moody’s.
While it’s astonishing that Japan’s rating is still as high as it is, the shift downwards is critical.
This is the beginning of the end.
That was Friday. This is Tyler Durden this morning:
Without doubt, the most memorable line from the latest quarterly report by the BIS, one which shows how shocked even the central banks’ central bank is with how perverted and broken the “market” has become is the following: “The highly abnormal is becoming uncomfortably normal…. There is something vaguely troubling when the unthinkable becomes routine.”
Overnight, “markets” did all in their (central banks’) power to justify the BIS’ amazement, when first the Nikkei closed green following another shocker of Japanese econ data, when it was revealed that the quadruple-dip recession was even worse than expected.
This is what the endgame looks like when a nation tries to spend its way to prosperity. I hope all the Krugmans of the world are taking note.
Join the conversation as a VIP Member